Item 1. Business

Overview

We are an autologous cell and gene therapy company focused on translating personalized biologics into medical breakthroughs for diseases affecting the skin and connective tissue. Our approach to personalized biologics is distinctive and the foundation of our personalized biologics platform is our proprietary autologous fibroblast technology. Fibroblasts are the most common cell in skin and connective tissue and are responsible for synthesizing extracellular matrix proteins, including collagen and other growth factors, that provide structure and support. Because fibroblasts naturally reside in the localized environment of the skin and connective tissue, they represent an ideal delivery vehicle for proteins targeted to these areas. We target the underlying cause of disease by using fibroblast cells from a patient's skin to create localized therapies with genetic modification that are compatible with the unique biology of the patient (i.e., autologous).

We are focused on discovering and developing localized therapies for diseases affecting the skin and connective tissue, where there are high unmet needs, to improve the lives of patients and their families. In that regard, we commit significant resources to our research and development programs. Currently, all of our research and development operations and focus are on gaining regulatory approvals to commercialize our product candidates in the United States; however, we may seek to expand into international markets in the future.

Our current pipeline consists of the following product candidates which we are developing in collaboration with Intrexon Corporation (Intrexon):

    

Our most advanced product candidate, FCX-007, is currently in a Phase I/II trial for the treatment of recessive dystrophic epidermolysis bullosa (RDEB). We are also in pre-clinical development of FCX-013, our product candidate for the treatment of linear scleroderma. In addition, we have a third program in the research phase for the treatment of arthritis and related conditions. See further discussion of our gene-therapy product candidates under the heading “Development Programs" included within section “Item 1—Business" of this Form 10-K.

Our Strategy

Our strategy is to develop and commercialize transformational therapies for diseases affecting the skin and connective tissue to improve the lives of patients and their families. Key elements of our strategy are:

Our Platform

Our proprietary autologous fibroblast technology is the foundation for creating personalized biologics for diseases of the skin and connective tissue. This technology uses a patented manufacturing process, which involves collecting small skin biopsies from patients, isolating cells and expanding them in culture, transducing the fibroblast cells with an integrative lentiviral vector to express a targeted protein, followed by continued expansion of the gene-modified cells in culture. In this manner, each patient is treated with cells that were cultivated from his or her own dermal tissue (i.e., autologous).

The Science of Autologous Fibroblasts

Fibroblasts are the basis of our personalized biologics platform because they are the most common cell in skin and connective tissue and are responsible for synthesizing extracellular matrix proteins, including collagen, that provide structure and support.

Personalized Biologics Approach

    

Because fibroblasts naturally reside in the localized environment of the skin and connective tissue, they represent an ideal therapeutic agent for the treatment of diseases affecting the skin and connective tissue. Utilizing our autologous fibroblast technology, we use a patient's fibroblast cells to create localized gene therapies that are compatible with the unique biology of the patient and have the potential to address the underlying cause of disease.

    

We believe our personalized biologics approach provides the following distinct advantages for creating gene therapies:

    

We are developing all of our gene-therapy product candidates in collaboration with Intrexon, a leader in synthetic biology. Through our collaboration with Intrexon, we have access to:

FCX-007 for Recessive Dystrophic Epidermolysis Bullosa (RDEB)

RDEB is the most severe form of dystrophic epidermolysis bullosa (DEB), a congenital, progressive, devastatingly painful and debilitating genetic disorder that often leads to death. RDEB is caused by a mutation of the COL7A1 gene, the gene which encodes for type VII collagen (COL7), a protein that forms anchoring fibrils. Anchoring fibrils hold together the layers of skin, and without them, skin layers separate causing severe blistering, open wounds and scarring in response to friction, including normal daily activities like rubbing or scratching. Children who inherit this condition are often called “butterfly children” because their skin can be as fragile as a butterfly’s wings. We estimate that there are approximately 1,100 - 2,500 RDEB patients in the U.S. Currently, treatments for RDEB address only the sequelae, including daily bandaging (which can cost a patient in excess of $10,000 per month), hydrogel dressings, antibiotics, feeding tubes and surgeries.

Our lead product candidate, FCX-007, is in clinical development for the treatment of RDEB. FCX-007 is a genetically-modified autologous fibroblast that encodes the gene for COL7 for localized treatment of RDEB and is being developed in collaboration with Intrexon. By genetically modifying autologous fibroblasts ex vivo to produce COL7, culturing them and then treating blisters and wounds locally via injection, FCX-007 offers the potential to address the underlying cause of the disease by providing high levels of COL7 directly to the affected areas, thereby avoiding systemic treatment. In addition, we believe the autologous nature of the cells, localized delivery, use of an integrative vector and the low turnover rate of the protein will contribute to long-term persistence of the COL7 produced by FCX-007.

FCX-007 has received orphan drug designation for the treatment of DEB, including RDEB, rare pediatric disease designation for the treatment of RDEB and Fast Track designation for the treatment of RDEB from the FDA.

Phase I/II Trial of FCX-007 for RDEB

The primary objective of this open-label trial is to evaluate the safety of FCX-007 in RDEB subjects. Additionally, the trial will assess (i) the mechanism of action of FCX-007 through the evaluation of type VII collagen expression and the presence of anchoring fibrils and (ii) the efficacy of FCX-007 through intra-subject paired analysis of target wound area by comparing FCX-007 treated wounds to untreated wounds in Phase I and to wounds administered with sterile saline in Phase II through the evaluation of digital imaging of wounds. Six adult subjects are expected to be treated with FCX-007 in the Phase I portion of the trial and six pediatric subjects in the Phase II portion of the trial. Prior to enrolling pediatric subjects, we are required to obtain allowance from the FDA and submit evidence of FCX-007 activity in adult subjects. The toxicology study

has been completed and submitted to the FDA. The study concluded that FCX-007 was well-tolerated up to six months post-administration.

We are actively recruiting adult subjects to complete enrollment in the Phase I portion of the trial and currently have four of the six adult subjects enrolled. The subjects in the Phase I portion of the trial are divided into two equal cohorts in order to evaluate the safety of FCX-007 in each population type. One cohort is comprised of subjects who have positive expression of the non-collagenous portion of COL7 protein (NC1+) and the other cohort is comprised of subjects who do not express the non-collagenous portion of the protein (NC1-). Subjects enrolled to date fulfilled the NC1+ cohort and also provided the first subject for the NC1- cohort. Two more subjects are required for the NC1- cohort to complete enrollment in the Phase I portion of the trial. The clinical trial protocol is designed to allow a cohort to move into the Phase II portion of the trial even if the other cohort is still enrolling or in the follow-up evaluation period.

The manufacture of FCX-007 for all four enrolled subjects is in process and we dosed our first subject in the first quarter of 2017. Additional adult subjects will be dosed after a required four week waiting period and subsequent safety testing is complete to ensure there are no safety concerns for the first dose of FCX-007. A revision to the clinical trial protocol reduced the waiting period from 90 days to four weeks based on the six months post-administration results from the pre-clinical toxicology study in immunocompromised mice. We expect to have three-month post-treatment data for safety, mechanism of action and efficacy for the Phase I portion of the trial in the third quarter of 2017 and expect to initiate the Phase II portion of trial in the fourth quarter of 2017.

FCX-013 for Linear Scleroderma

Linear scleroderma, a form of localized scleroderma, is a chronic autoimmune skin disorder that manifests as excess production of extracellular matrix, specifically type I collagen and type III collagen, resulting in thickening of the skin and connective tissue. The localized areas of skin thickening may extend to underlying tissue and muscle in children which can impair growth and development. Lesions appearing across joints can be painful, impair motion and may be permanent. Current treatments for linear scleroderma, which include systemic or topical corticosteroids, UVA light therapy and physical therapy, only address the symptoms of the disorder. We estimate that there are approximately 40,000 patients in the U.S. who have linear scleroderma over a major joint and exhibit severe joint pain.

Our second gene-therapy product candidate, FCX-013, is in pre-clinical development for the treatment of linear scleroderma. FCX-013 incorporates Intrexon’s proprietary RTS ^® switch, a biologic switch activated by an orally administered compound to control future protein expression once the initial fibrosis has been resolved. FCX-013 is designed to be injected under the skin at the location of the fibrosis where the genetically-modified fibroblast cells will produce a protein to break down excess collagen accumulation. The patient takes an oral compound to facilitate protein expression. Once the fibrosis is resolved, the patient will stop taking the oral compound which will stop further production of the subject protein by FCX-013.

We have successfully completed a proof-of-concept study for FCX-013 in which the primary objective was to determine whether FCX-013 had the potential to reduce dermal thickness in fibrotic tissue. In this study, FCX-013 was evaluated in a bleomycin-induced scleroderma model utilizing severe combined immunodeficiency (SCID) mice. Data from the study demonstrated that FCX-013 reduced dermal thickness of fibrotic tissue to levels similar to that of the non-treated control and further reduced the thickness of the sub-dermal muscle layer. Based upon these data and the FDA’s feedback to our pre-IND briefing package, we have advanced FCX-013 into a pre-clinical dose-ranging study in the fourth quarter of 2016. We expect to complete a toxicology/biodistribution study and submit an IND application for FCX-013 to the FDA in the fourth quarter of 2017.

FCX-013 has received orphan drug designation from the FDA for the treatment of localized scleroderma.

Gene Therapy Research Program for Arthritis and Related Conditions

Arthritis is a broad term that covers a group of more than 100 different types of diseases that affect the joints, as well as connective tissues and organs, including the skin. According to the Centers for Disease Control and Prevention, arthritis—characterized by joint inflammation, pain and decreased range of motion—is the United States’ most common cause of disability affecting more than 52 million adults as well as 300,000 children at a cost exceeding $120 billion.

Our third gene-therapy program is in the research phase and is focused on the treatment of arthritis and related conditions. Our goal is to deliver a protein therapy locally to the joint to provide sustained efficacy while avoiding key side effects typically associated with systemic therapy.

azficel-T for Vocal Cord Scarring

In June 2016, we reported that the primary efficacy endpoints were not met in our Phase II clinical trial of azficel-T for the treatment of vocal cord scarring resulting in chronic or severe dysphonia and as a result determined to wind-down azficel-T operations at our Exton, PA facility. See additional information included under the heading “Wind-down of azficel-T Operations” below and in Note 12 in the accompanying Consolidated Financial Statements contained in this Form 10-K.

Wind-down of azficel-T Operations

In connection with the Phase II clinical trial results for azficel-T for the treatment of vocal cord scarring resulting in chronic or severe dysphonia discussed above, we determined to wind-down azficel-T (including LAVIV) operations at our Exton, PA facility in order to focus our efforts and resources on our gene-therapy portfolio of product candidates. LAVIV (azficel-T) was previously approved by the FDA in June 2011 for the improvement of the appearance of moderate to severe nasolabial fold wrinkles in adults. To date, revenues from LAVIV product sales have been insignificant to our operations.

In connection with this wind-down, we terminated approximately 50% of our workforce, primarily in the areas of manufacturing and quality operations in the second quarter of 2016. In addition, we discontinued azficel-T with the FDA for fiscal year 2017, alleviating the requirement for annual product registration and establishment fees totaling approximately $0.6 million. We continue to maintain the license for azficel-T from a regulatory standpoint, including filing annual reports to FDA. With the focus now on our gene-therapy portfolio, we are seeking an acquiror for azficel-T.

During 2016, we incurred one-time termination costs in connection with the reduction in workforce, which include severance, benefits and related costs, of approximately $0.3 million. We also incurred approximately $0.4 million and less than $0.1 million, respectively, for inventory write-offs and asset impairment charges for equipment used in our azficel-T operations during 2016. While we don't anticipate significant additional charges in the future for contract termination and wind-down costs, asset impairments and costs to decommission our azficel-T manufacturing facility, there can be no assurance that such charges will not arise in the future. Please refer to Note 12 in the accompanying Notes to the Consolidated Financial Statements contained in this Form 10-K for further details including the financial statement impact this restructuring has had, and is expected to have, on our results of operations.

Intrexon Collaborations

Pursuant to the terms of the 2012 ECC, Intrexon has granted us a license to use its proprietary technologies and other intellectual property to research, develop and commercialize products in the 2012 Fields within the United States. We are

responsible for all costs incurred in connection with the research, development and commercialization of products under the 2012 ECC and own all clinical data, regulatory filings and regulatory approvals relating to such products. We engage Intrexon for support services for the research and development of products under the 2012 ECC, and reimburse Intrexon for its cost for time and materials for such services. 

We are required to pay Intrexon quarterly cash royalties on all products developed under the 2012 ECC in an amount equal to 7% of aggregate annualized net sales up to $100 million, plus 14% on aggregate annualized net sales greater than $100 million. We are also required to pay Intrexon half of any sublicensing revenues we receive from third parties in consideration for sublicenses granted by us with respect to products developed under the 2012 ECC, but only to the extent such sublicensing revenues are not included in net sales subject to royalties. Sales from LAVIV (azficel-T), including new indications, or other products that we develop and commercialize outside of the 2012 ECC are not subject to royalty payments unless we are able to reduce the product's cost of goods sold through the 2012 ECC, in which case, we are required to pay quarterly cash royalties on such products equal to one-third of the cost of goods sold savings less any such savings developed by us outside of the 2012 ECC. 

The 2012 ECC may be terminated by Intrexon if we fail to exercise diligent efforts in developing products through the collaboration or if we elect not to pursue the development of a therapy identified by Intrexon within the 2012 Field and that qualifies as a “Superior Therapy” as defined in the 2012 ECC.  Upon such termination, the products covered by the 2012 ECC in active and ongoing Phase II clinical trials or later stage development shall be entitled to be continued by us with a continuation of the related milestone, royalty and other payment obligations for such products, and all rights to products covered by the 2012 ECC still in an earlier stage of development shall revert to Intrexon.

In September 2015, we and Intrexon entered into a letter of agreement pursuant to which we mutually agreed to terminate our collaboration with respect to the development of potential therapies to treat Ehlers-Danlos Syndrome (hypermobility type) due to technical hurdles. As a result, we no longer have any rights or obligations under the 2012 ECC with respect to the development of “autologous human fibroblasts genetically modified to express bioactive Tenascin-X locally to correct connective tissue disorders”.

Currently, we are in development of two gene-therapy product candidates, FCX-007 and FCX-013, under the 2012 ECC, as more fully described under the heading "Development Programs" within “Item 1—Business" of this Form 10-K.

2015 Exclusive Channel Collaboration Agreement (2015 ECC)

In December 2015, we entered into an additional Exclusive Channel Collaboration Agreement with Intrexon (the 2015 ECC) pursuant to which we are Intrexon's exclusive channel collaborator in the research, development and commercialization of products for the treatment of chronic inflammation and degenerative diseases of human joints through intra-articular or other local administration of genetically-modified fibroblasts (the 2015 Field). The collaboration leverages our autologous fibroblast technology with Intrexon's synthetic biology technology to identify and develop cell-based therapeutics that will be genetically modified to express one or more proteins at sites of joint inflammation. We believe this treatment approach has the potential to overcome the limitations of existing therapies for chronic inflammation and degenerative diseases of the joint, including arthritis and related conditions.

Pursuant to the terms of the 2015 ECC, Intrexon has granted us a license to use its proprietary technologies and other intellectual property to develop and commercialize products in the 2015 Field throughout the world. We are responsible for all costs incurred in connection with the research, development and commercialization of products under the 2015 ECC and own all clinical data, regulatory filings and regulatory approvals relating to such products. We engage Intrexon for support services in connection with the research and development of products under the 2015 ECC, and reimburse Intrexon for its cost for time and materials for such services.

In consideration for the license and the other rights that we receive under the 2015 ECC, we paid Intrexon an up-front technology access fee of $10 million in cash in January 2016. For each product that we develop under the 2015 ECC, we are required to pay Intrexon development milestones of up to $30 million and commercialization milestones of up to $22.5 million, a low double-digit royalty on our net sales of such products and half of any sublicensing revenues we receive from third parties in consideration for sublicenses granted by us with respect to such products but only to the extent such sublicensing revenues are not included in net sales subject to royalties.

The 2015 ECC may be terminated by Intrexon if we fail to exercise diligent efforts in developing products through the collaboration or if we elect not to pursue the development of a therapy identified by Intrexon within the 2015 Field and that qualifies as a “Superior Therapy” as defined in the 2015 ECC.  Upon such termination, the products covered by the 2015 ECC

in active and ongoing Phase II clinical trials or later stage development shall be entitled to be continued by us with a continuation of the related milestone, royalty and other payment obligations for such products, and all rights to products covered by the 2015 ECC still in an earlier stage of development shall revert to Intrexon.

Currently, we are in the research phase for a gene-therapy product candidate for arthritis and related conditions under the 2015 ECC.

Manufacturing

We lease and operate our own manufacturing facility located in Exton, Pennsylvania. We have historically used this facility to manufacture our non-genetically modified products and during 2016 have begun using this facility for pre-clinical manufacturing of our gene-therapy product candidate, FCX-013.  We also outsource certain manufacturing of our genetically-modified product candidate, FCX-007, to a contract manufacturer with a facility located in Mountain View, California. We and our contract manufacturer adhere to the FDA's cGMP. We believe that we and our contract manufacturer have adequate manufacturing capacity to satisfy our pre-clinical and clinical demands.

The fibroblast cells that constitute our product candidates are cultured by our proprietary cGMP manufacturing process, beginning with the collection of skin biopsies from the patient’s skin.  Fibroblasts are extracted from the biopsies and cultured using standard culture techniques to increase the cell population. A viral transduction is then performed to introduce targeted genes to the cells. The fibroblasts are then further expanded and cryopreserved for storage.  When a treatment is requested, the cells are thawed, washed and prepared for shipment.

All component parts, including raw materials and other supplies utilized in our manufacturing process are available from various third party suppliers and manufacturers in quantities adequate to meet our needs. We seek to ensure continuity of supply of such component parts, raw materials and supplies using a strategy of dual sourcing, where possible. Some of our raw materials are currently sourced from one vendor; however, alternate vendors are available should they be required, although we would need sufficient lead time to qualify those vendors.     

We use certain hazardous chemicals and biological materials in our manufacturing process which are subject to a variety of federal, state and local laws and regulations governing, among other matters, the use, generation, manufacture, transportation, storage, handling, disposal of and human exposure to these materials, including regulation by governmental regulatory agencies, such as the Occupational Safety and Health Administration and the U.S. Environmental Protection Agency. We incur capital and operating expenditures and other costs in the ordinary course of our business in complying with these laws and regulations. We dispose of minimal hazardous biological waste as a result of our manufacturing process.

Intellectual Property

We believe that patents, trademarks, copyrights and other proprietary rights are important to our business.  We also rely on trade secrets, know-how and continuing technological innovations to develop and maintain our competitive position.  We seek to protect our intellectual property rights by a variety of means, including obtaining patents, maintaining trade secrets and proprietary know-how and technological innovation to operate, without infringing on the proprietary rights of others and to prevent others from infringing on our proprietary rights. 

As of December 31, 2016, we own or license 11 issued U.S. patents, 9 pending U.S. patent applications, 1 granted foreign patent, 1 pending international patent and 22 pending foreign patent applications.  Our issued patents and patent applications primarily cover the method of using autologous cell fibroblasts for the repair of skin and soft tissue defects and the use of autologous fibroblast cells for tissue regeneration.  In particular, we own an issued patent in the U.S. that is directed to methods of long-term augmentation of subcutaneous or dermal tissue by injecting an effective amount of a suspension of autologous passaged dermal fibroblasts into subadjacent tissue, which is set to expire in July 2020. In addition, we own an issued U.S. patent, an issued Australian patent, and pending applications in Canada, China, Europe, India, Japan, South Korea, Hong Kong and the U.S. directed to dosage formulations for injection containing particular amounts of autologous human fibroblasts and uses thereof, which naturally expire in 2030 and 2031. We also own pending applications in the U.S. and several foreign countries related to topical formulations of autologous dermal fibroblasts and uses thereof, the earliest of which, if issued, would naturally expire in 2027.

Competition

There is significant competition in the biopharmaceutical industry which can be attributed to companies ranging from small specialized biotechnology firms to large well-established pharmaceutical companies. More specifically, there are many companies currently competing in drug development for new therapies for the treatment of diseases affecting the skin, connective tissue and joints, our focus area. Some of our competitors have substantially greater financial resources and larger research and development organizations.  In addition, our experience in clinical trials, obtaining FDA and other regulatory approvals, manufacturing and commercialization of products may be more limited. 

Product competition is based on a variety of factors, including but not limited to: product safety, efficacy, convenience of dosing, availability, price, as well as brand recognition. Our product candidates, if approved for commercial use, will contend with treatments offered by our competitors. Although we believe the autologous nature and localized treatment approach of our product candidates provide advantages over our competitors, existing and new treatments may also possess certain advantages. Additionally, the development of other drug technologies and methods of treating diseases are occurring at a rapid pace. These developments may render our products or technologies obsolete or noncompetitive. Currently, we believe the primary competitors for our product candidates are as follows:

FCX-007 for RDEB. Our product candidate FCX-007 is being developed for the treatment of RDEB. Current treatments for RDEB, which include bandaging, antibiotics, feeding tubes, and surgery (hand and esophageal), only address the symptoms of this disorder. There are currently no products approved by the FDA for the treatment of RDEB. We are aware of a potentially competing product, EB-101, which is a genetically modified keratinocyte graft being developed by Abeona Therapeutics. EB-101 is currently in the Phase II portion of a Phase I/II clinical trial for the treatment of RDEB. In addition, we are aware of several other products in development for the treatment of various forms of epidermolysis bullosa (including DEB and RDEB), however, they are not designed to address the underlying genetic component of the disease. 

FCX-013 for Linear Scleroderma. Our product candidate FCX-013 is being developed for the treatment of linear scleroderma. Current treatments for linear scleroderma, which include systemic or topical corticosteroids, UVA light therapy, and physical therapy, only address the symptoms of the disorder. There are currently no products approved by the FDA for the treatment of linear scleroderma. We are aware of a potentially competing product, ECCS-50 Cellular Therapy, which is being developed by Cytori Therapeutics and is in a Phase III clinical trial for the treatment of scleroderma that affects the hands. We are also aware that miRagen Therapeutics has a product candidate, MRG-201, which utilizes microRNA biology and is in a Phase I clinical trial for the treatment of systemic and localized scleroderma.

Research and Development

We expense research and development costs as they are incurred.  For the years ended December 31, 2016 and 2015, we incurred total research and development expenses of approximately $12.1 million and $25.9 million , respectively. Additionally, for the years ended December 31, 2016 and 2015, we incurred expenses of less than $0.1 million and approximately $0.3 million , respectively, related to a research and development agreement that we have with a third party to investigate potential new non-pharmaceutical applications for our conditioned fibroblast media technology. Expenses pertaining to this research and development agreement are classified under the caption "Cost of collaboration revenue" in the Consolidated Statements of Operations.

Government Regulation

We are subject to extensive government regulation, principally by the FDA and state and local authorities in the United States and by comparable agencies in foreign countries.  Governmental authorities in the United States extensively regulate the pre-clinical and clinical testing, safety, efficacy, research, development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution, among other things, of pharmaceutical and biologic products under various federal laws including the Federal Food, Drug and Cosmetic Act (FFDCA), the Public Health Service Act (PHSA) and under comparable laws by the states and in most foreign countries.

Domestic Regulation  

In the United States, the FDA, under the FFDCA, the PHSA, and other federal statutes and regulations, subjects pharmaceutical and biologic products to rigorous review.  If we do not comply with applicable requirements, we may be subjected to various enforcement actions, such as product seizures and court injunctions, the government may refuse to approve our marketing applications, and we could even be criminally prosecuted in certain circumstances.  The FDA also has the

authority to suspend or revoke our Biologics License Application (BLA), issue adverse publicity, and take other measures if we fail to comply with regulatory standards or if we encounter problems during commercial operations.

FDA Approval Process

To obtain approval of a new drug product from the FDA, we must, among other requirements, submit data demonstrating the product’s safety and efficacy, and for a biologic product, demonstrating its safety, purity, and potency, which includes efficacy, as well as detailed information on the manufacture and composition of the product candidate.  In most cases, this entails extensive laboratory tests and pre-clinical and clinical trials.  This testing and the preparation of necessary applications and processing of those applications by the FDA are expensive and typically take many years to complete.  The FDA may deny our applications or may not act quickly or favorably in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketing any products we may develop.  The FDA also may require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products.  Regulatory authorities may withdraw product approvals if we fail to comply with regulatory standards or if we encounter problems following initial marketing.  With respect to patented products or technologies, delays imposed by the governmental approval process may materially reduce the period during which we may have the exclusive right to exploit the products or technologies.

The FDA does not apply a single regulatory scheme to human tissues and the products derived from human tissue.  On a product-by-product basis, the FDA may regulate products as drugs, biologic products, or medical devices, in addition to regulating them as human cells, tissues, or cellular or tissue-based products (HCT/Ps), depending on whether or not the particular product triggers any of an enumerated list of regulatory factors.  A fundamental difference in the treatment of products under these classifications is that the FDA generally permits HCT/Ps that do not trigger any of those regulatory factors to be commercially distributed without regulatory approval.  In contrast, products that trigger those factors, such as if they are more than minimally manipulated when processed or manufactured, are regulated as drugs, biologics, or medical devices and require FDA approval.  We have determined that our product candidates trigger regulatory factors that make them biologic products, in addition to an HCT/Ps, and consequently, we must obtain approval from the FDA before marketing such products and must also satisfy all regulatory requirements for HCT/Ps.

The process required by the FDA before a new drug or biologic product may be marketed in the United States generally involves the following:

Pre-clinical tests include laboratory evaluation of product chemistry formulation and stability, as well as animal and other studies to evaluate toxicity.  Under FDA regulations, the results of any pre-clinical testing, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND application.  The FDA requires a 30-day waiting period after the filing of each IND application before clinical trials may begin, in order to ensure that human research patients will not be exposed to unreasonable health risks.  At any time during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials, may authorize trials only on specified terms, or may require additional trials.  The IND application process may become extremely costly and substantially delay development of our products.  Moreover, positive results of pre-clinical tests will not necessarily indicate positive results in clinical trials. 

The sponsor typically conducts human clinical trials in three sequential phases, which may overlap.  These phases generally include the following:

Before proceeding with a trial, the sponsor may seek a written agreement from the FDA regarding the design, size, and conduct of a clinical trial.  This is known as a Special Protocol Assessment (SPA).  Among other things, SPAs can cover clinical trials for pivotal studies whose data will form the primary basis to establish a product’s efficacy.  SPAs thus help establish up-front agreement with the FDA about the adequacy of a clinical trial design to support a regulatory approval, but the agreement is not binding if new circumstances arise.  Even if the FDA agrees to a SPA, the agreement may be changed by the sponsor or the FDA on written agreement by either parties, or if a senior FDA official determines that a substantial scientific issue essential to determining the safety or effectiveness of the product was identified after the testing began.  There is no guarantee that a study will ultimately be adequate to support an approval, even if the study is subject to a SPA.  The FDA retains significant latitude and discretion in interpreting the terms of the SPA and the data and results from any study that is the subject of the SPA. The FDA may revoke or alter its SPA agreement under the following circumstances:

Clinical trials must meet requirements for Institutional Review Board (IRB) oversight, patient informed consent and the FDA’s Good Clinical Practice (GCP).  Prior to commencement of each clinical trial, the sponsor must submit to the FDA a clinical plan, or protocol, accompanied by the approval of the committee responsible for overseeing clinical trials at the clinical trial sites.  The FDA or the IRB at each institution at which a clinical trial is being performed may order the temporary or permanent discontinuation of a clinical trial at any time if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients.  Data safety monitoring committees, which monitor certain studies to protect the welfare of study patients, may also require that a clinical trial be discontinued or modified.

The sponsor must submit to the FDA the results of the pre-clinical and clinical trials, together with, among other things, detailed information on the manufacturing and composition of the product, and proposed labeling, in the form of an NDA, or, in the case of a biologic product, a BLA.  The applicant must also submit with the NDA or BLA a substantial user fee payment, unless a waiver or reduction applies.  In some cases, a sponsor may be able to expand the indications in an approved NDA or BLA through a submission of a Prior Approval Supplement.  Each NDA or BLA submitted for FDA approval is usually reviewed for administrative completeness and reviewability within 60 days following submission of the application.  If deemed complete, the FDA will “file” the NDA or BLA, thereby triggering substantive review of the application.  The FDA can refuse to file any NDA or BLA that it deems incomplete or not properly reviewable.  Once the submission has been accepted for filing, the FDA will review the application and will usually respond to the applicant in accordance with performance goals the FDA, industry and Congress have negotiated for the review of NDAs and BLAs. For NDAs for new molecular entity drugs and for original BLA submissions, the review period is six months from the filing date of the application for priority applications and ten months from the filing date for standard applications.  The review process is often significantly extended by FDA requests for additional information, pre-clinical studies or clinical trials, clarification, or a risk evaluation and mitigation strategy (REMS) or by changes to the application submitted by the applicant in the form of amendments.  The FDA may refer applications for novel product candidates which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation, and a recommendation as to whether the

application should be approved and under what conditions.  The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Before approving an NDA or BLA, the FDA will often inspect the facilities at which the product is manufactured and will not approve the product unless the manufacturing facilities are in compliance with cGMP requirements which govern the manufacture, holding and distribution of a product.  Manufacturers of human cellular or tissue-based biologics also must comply with the FDA’s Good Tissue Practices, as applicable, and the general biologic product standards. 

It is possible that our product candidates will not successfully proceed through this approval process or that the FDA will not approve them in any specific period of time, or at all.  The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria, or if the FDA determines that the clinical data do not adequately establish the safety and efficacy of the product.  Satisfaction of FDA pre-market approval requirements for a new biologic product is a process that may take a number of years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.  The FDA reviews these applications and, when and if it decides that adequate data are available to show that the product is both safe and effective and that other applicable requirements have been met, approves the drug or biologic product for marketing.  Government regulation may delay or prevent marketing of potential products for a considerable period of time and imposes costly procedures upon our activities.  Success in early stage clinical trials does not assure success in later stage clinical trials.  Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval.  Upon approval, a product candidate may be marketed only for those indications approved in the NDA or BLA and will be subject to labeling and promotional requirements or limitations, including warnings, precautions, contraindications and use limitations, which could materially impact profitability.  Once approved, the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards and requirements are not maintained or if safety, efficacy or other problems occur after the product reaches the marketplace.

The FDA may, during its review of an NDA or BLA, ask for additional study data.  If the FDA does ultimately approve the product, approval may be subject to limitations based on the FDA's interpretation of the existing pre-clinical and clinical data and the FDA may require post-marketing testing, including potentially expensive Phase IV studies, to confirm or otherwise further evaluate the safety and effectiveness of the product.  The FDA also may require, as a condition to approval or continued marketing of a drug, a REMS to ensure that the benefits of a drug or biologic product outweigh its risks.  A REMS can include additional educational materials for healthcare professionals and patients such as Medication Guides and Patient Package Inserts, a plan for communicating information to healthcare professionals, and restricted distribution of the product.  In addition, the FDA may, in some circumstances, impose restrictions on the use of the product, which may be difficult and expensive to administer and may require prior approval of promotional materials.  Following approval, the FDA may require labeling changes or impose new post-approval study, risk management, or distribution restriction requirements.

The FDA has developed four distinct programs intended to make drugs that address unmet medical needs for serious or life threatening conditions available as rapidly as possible, especially when the drugs are the first available treatment or have advantages over existing treatments: accelerated approval, fast track, breakthrough therapy, and priority review.

nonclinical and clinical data and permits the FDA to offer product development or regulatory advice for the purpose of shortening the potential time to product approval. The FDA may rescind breakthrough therapy designation if it believes the designated product no longer meets the qualifying criteria. Breakthrough therapy status does not guarantee that a product will be developed or reviewed more quickly and does not ensure FDA approval.

Additionally, there are various designations available to drugs and biologic products that provide a sponsor with incentives to support approval of the product candidate, including, but is not limited to, orphan drug designation and rare pediatric disease designation.

Orphan Drug Designation

Under the U.S. Orphan Drug Act, the FDA may grant orphan drug designation to drugs or biologic products intended to treat a "rare disease or condition," which is generally defined as having a prevalence of less than 200,000 individuals in the U.S. Orphan drug designation must be requested before submitting an NDA or BLA for the product. Orphan drug designation does not shorten the regulatory review and approval process, nor does it provide any advantage in the regulatory review and approval process. However, if an orphan drug later receives approval for the indication for which it has designation, the relevant regulatory authority may not approve any other applications to market the same drug for the same indication, except in very limited circumstances, for seven years in the U.S. Although obtaining approval to market a product with orphan drug exclusivity may be advantageous, we cannot be certain:

Additionally, orphan drug exclusive marketing rights may be lost under certain conditions, such as if the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug.

FCX-007 and FCX-013 have each received orphan drug designation from the FDA.

Rare Pediatric Disease Designation

FCX-007 has received rare pediatric disease designation from the FDA for the treatment of RDEB. The FDA generally defines a "rare pediatric disease" as a disease that affects fewer than 200,000 individuals in the U.S. primarily under the age of 18 years old. Under the FDA's Rare Pediatric Disease Priority Review Voucher (PRV) program, upon the approval of an NDA or BLA for a product for the treatment of a rare pediatric disease, the sponsor of such application is eligible for a Rare Pediatric Disease Priority Review Voucher. Currently, the Priority Review Voucher can be used to obtain priority review for any subsequent NDA or BLA and may be sold or transferred an unlimited number of times. Under the 21 ^st Century Cures Act, Congress extended the PRV program for rare pediatric diseases through 2020. A drug designated as a drug for a rare pediatric disease by September 30, 2020, and approved by September 30, 2022, may receive a voucher. Because this program has been subject to criticism, including by the FDA, it is possible that even if we obtain approval for FCX-007 and qualify for a Priority Review Voucher, the program may no longer be in effect at the time of FCX-007's approval.

    

Ongoing FDA Requirements and Post-Marketing Obligations

The Food and Drug Administration Amendments Act of 2007 expanded FDA authority over drug products after approval.  All approved drug products are subject to continuing regulation by the FDA, including record-keeping requirements, reporting of adverse experiences with the product, sampling and distribution requirements, notifying the FDA and gaining its approval of certain manufacturing or labeling changes, complying with certain electronic records and signature requirements, submitting periodic reports to the FDA, maintaining and providing updated safety and efficacy information to the FDA, and complying with FDA promotion and advertising requirements.  Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, seizure of product, injunctive action, criminal prosecution, or civil penalties.

The FDA may require post-marketing studies or clinical trials to develop additional information regarding the safety of a product.  These studies or trials may involve continued testing of a product and development of data, including clinical data, about the product’s effects in various populations and any side effects associated with long-term use.  The FDA may require post-marketing studies or trials to investigate possible or known serious risks or signals of serious risks, or to identify unexpected serious risks, and may require periodic status reports if new safety information develops.  Failure to conduct these studies in a timely manner may result in substantial civil penalties, or withdrawal of product approval.

Also, newly discovered or developed safety or efficacy data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, additional pre-clinical studies or clinical trials, or even in some instances, withdrawal of the approval.  Violations of regulatory requirements at any stage, including after approval, may result in various adverse consequences, including the FDA’s withdrawal of an approved product from the market, other voluntary or FDA-initiated action that could delay or restrict further marketing, and the imposition of civil fines and criminal penalties against the manufacturer or the NDA or BLA holder.  In addition, later discovery of previously unknown problems may result in restrictions on the product, manufacturer or NDA or BLA holder, including withdrawal of the product from the market. 

The labeling, advertising, promotion, marketing and distribution of a drug or biologic product also must be in compliance with FDA and Federal Trade Commission (FTC) requirements which include, among other things, promotional activities, standards and regulations for direct-to-consumer advertising, promotional activities involving the internet, and industry sponsored scientific and educational activities.  In general, all product promotion must be consistent with the labeling approved by the FDA for such product, contain a balanced presentation of information on the product’s uses, benefits, risks, and important safety information and limitations on use, and otherwise not be false or misleading.  The FDA and the FTC have very broad enforcement authority, and failure to abide by these regulations can result in penalties, including the issuance of a warning letter directing a company to correct deviations from regulatory standards and enforcement actions that can include seizures, injunctions and criminal prosecution.  Failure to comply with applicable FDA requirements and restrictions also may subject a company to adverse publicity and enforcement action by the FDA, the U.S. Department of Justice (DOJ) or the Office of the Inspector General of the U.S. Department of Health and Human Services (HHS) as well as state authorities.  This could subject the company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a company promotes or distributes its products.

Drug and biologic product manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and to list their products with the FDA.  The FDA periodically inspects manufacturing facilities in the United States and abroad in order to assure compliance with the applicable cGMP regulations and other requirements. These cGMP requirements apply to all stages of the manufacturing process, including production, processing, sterilization, packaging, labeling, storage and shipment. Facilities also are subject to inspections by other federal, foreign, state and local agencies.  In complying with the cGMP regulations, manufacturers must continue to assure that the product meets applicable specifications, regulations and other post-marketing requirements.  Failure to comply with these requirements subjects the manufacturer to possible legal, regulatory or voluntary action, such as suspension of manufacturing or recall or seizure of product.

Sponsors and their third-party contractors are also subject to various laws and regulations governing laboratory practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances in connection with their research. The FDA has regulatory and enforcement power to disqualify nonclinical laboratory studies performed by a violative facility from being considered by FDA in support of any application for a research or marketing permit; to publicly disclose the fact of such disqualification; and to pursue any other available and appropriate judicial proceeding or regulatory action, such as court-ordered injunctions denial or withdrawal of regulatory approvals and referral to other federal, state or local government law enforcement or regulatory agencies.

Furthermore, new government requirements may be established that could delay or prevent regulatory approval of our products under development, or affect the conditions under which approved products are marketed. 

HIPAA Requirements

Other federal legislation may affect our ability to obtain certain health information in conjunction with our research activities.  We may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.  The Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH), and its implementing regulations, imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. HIPAA also prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statements or representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services.

In addition, numerous federal and state laws and regulations that address privacy and data security, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), govern the collection, use, disclosure and protection of health-related and other personal information. Failure to comply with data protection laws and regulations could result in government enforcement actions and create liability for us (which could include civil and/or criminal penalties), private litigation and/or adverse publicity that could negatively affect our business.

Failure to achieve and sustain compliance with applicable federal and state privacy, security and fraud laws may could result in government enforcement actions and create liability for us (which could include civil and/or criminal penalties), private litigation and/or adverse publicity that could negatively affect our operating results and business.

Other U.S. Regulatory Requirements

In the United States, the research, manufacturing, distribution, sale, and promotion of drug and biologic products are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the HHS (e.g., the Office of Inspector General), the DOJ and individual U.S. Attorney offices within the DOJ, and state and local governments.  For example, sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, and similar state laws, each as amended.

If we successfully commercialize any of our products, we may participate in the Medicaid Drug Rebate Program. Participation is required for federal funds to be available for our products that we successfully commercialize under Medicaid and Medicare Part B. Under the Medicaid Drug Rebate Program, we would be required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Part B of the Medicare program.

Federal law requires that any company that participates in the Medicaid Drug Rebate Program also participate in the Public Health Service’s 340B drug pricing program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B drug pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients.

Under Section 603 of the Veterans Health Care Act of 1992 (VHCA), drug companies that participate in Medicaid or Medicare Part B are required to offer their “covered drugs” (biologic products and innovator drugs) for sale on a Federal Supply Schedule (FFS) contract at a statutorily reduced price to four federal agencies including the U.S. Department of Veterans Affairs, the U.S. Department of Defense, the Public Health Service and the Coast Guard. Participation under Section 603 the VHCA requires submission of pricing data and calculation of discounts pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulation. In addition, pursuant to regulations issued by the Department of Defense TRICARE Management Activity, now the Defense Health Agency, to implement Section 703 of the National Defense Authorization Act for Fiscal Year 2008, manufacturers are required to pay rebates on “covered drug” prescriptions dispensed to TRICARE beneficiaries by TRICARE network retail pharmacies.  All of these activities are also potentially subject to federal and state consumer protection, unfair competition, and other laws.

In March 2010, President Obama signed into law the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together, the Affordable Care Act). The Affordable Care Act substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Affordable Care Act intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms.  The Affordable Care Act has resulted in, and we expect it will continue to result in, downward pressure on coverage and the price of products covered by Medicare and other government programs. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments and coverage from private payors.  The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products.  In addition, changes to the Affordable Care Act remain possible and appear likely in the 115th United States Congress and under the administration of President Trump. It is possible that there will be further legislation or regulation that could harm our business, financial condition and results of operations.

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs.  This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting some business arrangements from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from federal Anti-Kickback Statute liability.  The Affordable Care Act, among other things, clarified that liability may be established under the federal Anti-Kickback Statute without proving actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute, which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

The federal civil False Claims Act prohibits, among other things, any person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds; knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government; or knowingly concealing or knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government. The False Claims Act also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the statute and to share in any monetary recovery. Recently, several pharmaceutical and other healthcare companies have been faced enforcement actions under the federal civil False Claims Act for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have faced enforcement actions for causing false claims to be submitted because of the companies’ marketing of the product for unapproved, and thus non-reimbursable, uses. False Claims Act liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $5,500 to $11,000 per false claim or statement (and $10,781 to $21,563 per false claim or statement for penalties assessed after August 1, 2016 for violations occurring after November 2, 2015). 

International Regulation

The regulation of our product candidates outside of the United States varies by country.  Certain countries regulate human tissue products as a pharmaceutical product, which would require us to make extensive filings and obtain regulatory approvals before selling our product candidates.  Certain other countries classify our product candidates as human tissue for transplantation but may restrict its import or sale.  Other countries may have no application regulations regarding the import or sale of products similar to our product candidates, creating uncertainty as to what standards we may be required to meet.

Employees

As of December 31, 2016, we had 23 full-time employees, all located in the United States.  Of these full-time employees, 13 are engaged in research, development and manufacturing (including facilities) functions and 10 are engaged in finance, legal, human resources, information technology, and other general administrative functions. None of our employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be good. 

Corporate Information

We were incorporated under the laws of the State of Delaware in September 1992. Our corporate office is located at 405 Eagleview Boulevard, Exton, Pennsylvania 19341. Our telephone number is (484) 713-6000. We maintain an Internet website at www.fibrocell.com. The information contained on our website is not incorporated by reference into this Form 10-K.

We file reports, proxy and information statements and other information with the SEC. We make available free of charge under the “Investors—SEC Filings” section of our website all of our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to such documents, each of which is provided on our website as soon as reasonably practicable after we electronically file the information with the SEC.

The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.